SEC decides not to extend research services enforcement no-action letter to SIFMA

William Birdthistle, director of the SEC’s division of investment management, attributed research services market developments as a reason behind choosing not to extend the temporary position.

The Securities and Exchange Commission (SEC) has set out plans to allow its no-action letter to the Securities Industry and Financial Markets Association (SIFMA)3, based on enforcements surrounding research services, to expire on 3 July next year.

The SEC, in its 2017 no-action letter to SIFMA, advised that it would not recommend enforcement action to broker-dealers accepting cash payments for research from investment managers which are required by Mifid II to pay for research from its own money as opposed to client commissions or ‘soft dollars’. It was originally due to expire on 3 July 2020.

“This letter was issued to allow time for the division and the industry to address questions about how broker-dealers would be able to receive compensation for research services after Mifid II went into effect,” said William Birdthistle, director, division of investment management at the SEC.

“Although the staff extended the temporary position through the summer of next year, the letter was not intended to be a permanent solution to the issue.”

The decision to let the no-action letter expire next year has the potential to destabilise research arrangements between broker-dealers and investment managers that have been structured to comply with Mifid II. This is particularly relevant because many broker-dealers are still accepting cash or ‘hard dollar’ payments for research under the no-action letter.

Birdthistle noted, however, that since issuing the no-action letter, the SEC has engaged extensively with market participants and firms have since been able to develop a range of solutions to address the impact of Mifid II, with some broker-dealers dually registering as investment advisers and others utilising a registered adviser affiliate to provide certain research services.

As a result of what Birdthistle described as “developments in the marketplace for research services”, the division stated that it does not intend to extend the temporary position beyond its current expiration date in July 2023.

“Accordingly, the division plans for the temporary position to expire on 3 July next year and does not expect to issue further assurances with respect to the adviser status of broker-dealers accepting compensation under Mifid II arrangements,” added Birdthistle.

“However, to the extent that the no-action letters include statements or positions that are independent of the temporary adviser status position, such as those regarding client commission arrangements, they are not being rescinded. We are making our intentions known well in advance of July 2023 to allow ample time to address any particular issue.”

The clarification will allow broker dealers to restructure existing hard-dollar arrangements in the event of the no-action letter expiring.

Concluding his speech, Birdthistle said: “As we have at each step of the Mifid II process, the staff encourages members of the public to engage with us on any particular issue relating to Mifid II, including any concerns related to the expiration of the temporary no-action position.”